David DeSonier - SVP of Strategy and IR Karl Glassman - President, CEO and MD Matt Flanigan - CFO Perry Davis - SVP and President, Residential Furnishings Susan McCoy - VP, IR.

Bobby Griffin - Raymond James Daniel Moore - CJS Securities Dillard Watt - Stifel Keith Hughes - SunTrust Robinson Humphrey.

Greetings, and welcome to the Leggett & Platt Third Quarter 2016 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David DeSonier, Senior Vice President, Strategy and Investor Relations for Leggett & Platt. Thank you. You may begin..

Karl Glassman, who is President and CEO of the company; Matt Flanigan, our Executive Vice President and CFO; and Susan McCoy, our VP of Investor Relations. Perry Davis, who is Senior Vice President of the company and President of the Residential Furnishing segment is also joining us this morning to participate in Q&A.

The agenda for our call is as follows. Karl Glassman will start with a summary of the major statements we made in yesterday’s press release and provide segment highlights. Matt Flanigan will discuss financial details and address our outlook for the remainder of 2016. And finally, the Group will answer any questions that you have.

This conference is being recorded for Leggett & Platt and is copyrighted material. This call may not be transcribed, recorded or broadcasted without our expressed permission. A replay is available from the IR portion of Leggett’s website.

We posted to the IR portion of the website, a set of PowerPoint slides that contains summary financial information, along with segment details. Those slides supplement the information we discuss on this call, including non-GAAP reconciliations.

I need to remind you that remarks today concerning future expectations, events, objectives, strategies, trends or results constitute forward-looking statements, actual results or events may differ materially due to a number of risks and uncertainties, and the company undertakes no obligation to update or revise these statements.

For a summary of these risk factors and additional information, please refer to yesterday’s press release and the sections in our 10-K entitled forward-looking statements. I’ll now turn the call over to Karl Glassman..

Good morning and thank you for participating in our third quarter call. Yesterday, we reported another quarter of strong earnings despite lower than anticipated sales. For the full year, we continue to expect record earnings per share from continuing operations, strong EBIT margins and a significant improvement in operating cash flow.

Third quarter sales decreased 6% to $949 million, with 4% of the reduction due to four small divestitures completed in the past 12 months, same location sales were down 2% from slightly lower unit volume, raw material related price decreases and currency impact.

Our third quarter EBIT decreased versus third quarter last year primarily reflecting a lower year-over-year benefit from commodity deflation and lower unit volume. Third quarter EBIT margin decreased by 30 basis points compared to the prior year, but it was stronger than expected at 13.7%.

Third quarter earnings per share from continuing operations were $0.67 or flat with the same quarter last year. The EBIT decrease was offset in the quarter by a lower effective tax rate related to the new accounting standard for stock-based compensation and a reduced share account, both of which were in line with forecast.

Given our third quarter results and lower current commodity costs, we have increased our full year EPS guidance on a lower sales outlook. Matt will discuss our 2016 guidance in a few minutes. Last month that at Investor Day, we outlined our TSR framework, including an expectation for long-term revenue growth of 69%.

We believe the macro environment driven by consumer confidence, housing, employment, wages and interest rates should support modest revenue growth in our end markets over the next few years.

In addition, we continue to focus on content gains and new program awards across our businesses and therefore expect to continue growing organically at a rate faster than our markets. Strategic acquisitions are also expected to add to long-term growth.

Margin expansion and share repurchases should contribute modestly to long-term TSR and our commitment to dividend growth is unwavering. In short, we remain fully committed to our longstanding goal of achieving TSR that ranks in the top third of the S&P 500. Now to the segments.

In residential furnishings, third quarter same location sales were down 8%, unit volume decreased 6% and raw material related price deflation and currency reduced sales by 2%. Lower pass-through sales of adjustable beds represented 3% of the unit volume decrease.

Sales trends for the major businesses and product categories excluding deflation and currency were as follows; U.S. Spring component dollar sales decreased 6%. Innerspring units decreased 7% and boxspring unit volume was down 9%. Comfort core units decreased 2% during the quarter.

International spring sales decreased 3%, furniture component sales were down 5% with sales in the seat and sofa sleeper businesses down 7% and motion hardware unit volume down 2%. The segments EBIT decreased slightly in the quarter with the impact from lower unit volume largely offset by pricing discipline.

EBIT margin improved impart to the lower adjustable bed pass-through sales. In the commercial product segment, third quarter same location sales decreased 4%, growth in work furniture was more than offset by lower sales and adjustable bed with those units down 10% during the quarter.

Segment EBIT and EBIT margin decreased slightly, primarily from lower volume. In the industrial material segment, third quarter same location sales were down 8% from steel related price decreases and lower unit volume in Drawn Wire. Total sales also decreased versus the prior year from two divestitures.

The first was the steel tubing business that we sold in late 2015 and the second was the small wire products operation that we sold in the second quarter. The segments EBIT decreased slightly in the quarter, primarily from lower unit volume. EBIT margin improved a 110 basis points to 9% impart from divesting lower margin businesses.

And the specialized product segment, third quarter same location sales increased 6% from continued strength in automotive, excluding minor currency changes automotive sales grew 14%, machinery sales decreased 5% and aerospace same location sales were down 9% in the quarter.

The segments EBIT grew and EBIT margin improved a 150 basis points primarily from higher volume and currency benefits. I'll now turn the call over to Matt..

Thanks, Karl, and good morning, everyone. Cash from operations was once again strong during the quarter at $124 million, bringing the year-to-date total to $200 million to $386 million. Operating cash flow continues to benefit from working capital management.

We ended the quarter with adjusted working capital as a percentage of annualized sales at 10.8%. With strong year-to-date performance through the third quarter, we now expect full year cash from operations to exceed $525 million.

As uses of cash for the full year, dividend should require about $175 million and capital expenditure should approximate $125 million. In August, we declared a quarterly dividend of $0.34 per share, which represents a 6.3% increase versus the third quarter of 2015. Our target range for dividend payout is 50% to 60% of net earnings.

Actual payout has been higher until last year, but with our strong earnings growth we are now within the targeted payout range. Accordingly, future dividend growth should more closely align with earnings growth.

At yesterday's closing price of $44.39, the current yield is 3.1%, which is one of the higher yields among the 50 companies that comprise the S&P 500 dividend aristocrats. During the third quarter, we've repurchased 500,000 of our stock at an average price of $52.77 and issued 800,000 shares through employee benefit plans and option exercises.

Year-to-date, we have repurchased 4.2 million shares at an average price of $46.47 and issued 2.2 million shares. As has been our practice, after funding capital expenditures and dividends, the remaining cash flow will be prioritized toward competitively advantage acquisitions.

Potential acquisitions must meet stringent strategic and financial criteria. Should no acquisitions come to fruition and if excess cash flow is available, we have a standing authorization from the Board to repurchase up to 10 million shares each year. However, no specific repurchase commitment or time table has been established.

Our financial base remains very strong and this gives us considerable flexibility, when making capital and investment decisions. We ended the third quarter with net debt to net capital at 36% well within our longstanding targeted range of 30% to 40%. We also monitored debt-to-EBITDA.

At the end of September our debt was 1.7 times, our trailing 12 months adjusted EBITDA. We assess our overall performance by comparing our total shareholder return to that of pure companies on a rolling three-year basis.

Our target is to achieve TSR in the top one third of the S&P 500 over the long-term, which we believe will require an average TSR of 11% to 14% per year. For the three-year period that will end on December 31, 2016, we have so far generated compound annual TSR of 17% per year. That performance places us within the top 14% of the S&P 500.

As we announced yesterday, we are raising our 2016 EPS guidance. We now expect record full year earnings from continuing operations of $2.55 to $2.62 per share versus our prior EPS range of $2.45 to $2.60. Full year guidance now anticipates 2016 sales of approximately $3.75 billion or a 4% decrease from 2015.

This assumes approximately 2%-unit volume growth offset by a 3% reduction from divestitures net of small acquisitions and a 3% decrease from commodity deflation and currency. Prior guidance anticipates sales of approximately $3.9 billion on mid-single digit unit volume growth and slightly less impact from commodity deflation.

Our implied fourth quarter EPS guidance range is now $0.53 to $0.60 on sales of approximately $900 million. We expect to close the year with strong margin performance based upon our guidance range the full year adjusted EBIT margin should be between 13.3% and 13.7%.

The two main changes in our full year EPS guidance are one, the lower expected level of unit volume growth and two, an offsetting benefit from lower than expected steel prices, both of which were also reflected in our strong third quarter EPS performance.

In our July forecast, we assume that the second quarter steel cost inflation withhold through the remainder of the year.

Therefore, our prior guidance reflected short-term earnings and margin pressure from the typical pricing lag associated with pass no long hard cost, instead of inflation holding market prices for certain types of steel actually began to deflate as the third quarter progressed.

Our updated full year EPS guidance now assumes less benefit from unit volume growth, but that impact has offset by lower commodity cost. With those comments, I’ll now turn the call back over to David DeSonier..

That concludes our prepared remarks. We thank you for your attention and we will be glad to answer your questions. In order to allow everyone an opportunity to participate, we request that you ask only one question and then yield to the next participant.

If you have additional questions you are welcome to reenter the queue and we will answer those questions as well. Melissa, we are ready to begin the Q&A..

Thank you. [Operator Instructions] our first question comes from the line of Dan Moore with CJS Securities. Please proceed with your question..

Good morning. Thanks for taking the question..

Hi, Dan..

Dan..

I wanted to just drill down on residential furnishing volumes a little bit maybe give us a little bit more color over the last few months obviously decelerated is it simply tough comp do you see the consumer pulling back a little bit or was it more primarily office in commercial maybe just a little bit more color around the trends that you’re seeing there?.

Yeah, Dan, this is Perry Davis, so I think it’s a little bit of combination of both.

Things are a little bit tough at retail just was at the high point furniture market over the weekend and that was generally the mood of that although in the fracture business there seems to be a little momentum building right now, but it has been kind of a tough slot there.

In bedding, we really do have some tough comps last year as an example we reported here a 2% drop in our comfort core volume, which had been on a pretty much a tear for the last couple of years.

We’re kind of lapping some strong numbers last year and if you look at the increase in comfort core in the third quarter of ‘15 as opposed to the third quarter of ‘14 we were up 37% so being down to here, well that’s now where we want to be obviously, it’s still indicative of some of the retail comps that we have..

One quick follow-up perhaps just wanted to talk a little bit about 2017 in your analyst day you gave a three year TSR guidance range in terms of high single-digit or I should say earnings guidance range in terms of high single-digit CAGR, next year you’ve got perhaps tax braids normalized a bit higher, maybe a little bit more LIFO headwind if steel picks up.

How should we think about ‘17 as it relates to that kind of longer term guidance?.

Dan, we’ll talk about our 2017 guidance when we get to the end of January and we release on the full year.

You touched on a couple of the independent variables to think about, we don’t know when we’ll have sustained inflation that at some point, we would expect to encounter some and that would typically give us a little bit of short term margin headwind that we've had to deal with for a while.

Our tax rate this year 25% is probably lower than where we will end next year something in the 27, 28 range would be a reasonable place to start thinking about and you'll remember that we also last quarter had sixth sense of unusual things that they are embedded in this 2.35 to 2.62 continuing up in the guidance and so from there it goes to top-line and like I said, we’ll create some framework around that after we get enough the quarter behind this, get a better look at forecasts and try to get a feel for where we think next year will go.

Understand that the 2019 framework that we put out there, as I know you do, is clearly a bit longer-term and the comments that Karl had in his prepaid remark.

We still feel good about kind of the macro backdropping supportive of reasonable health in our markets and the things that we’ve been doing on the content front in auto and bedding and category growth and adjustable and the things other things that we highlighted at Investor Day, we still have confident in our ability to make those things happen over the next two to three years..

Great colors, thank you. I’ll get back in queue..

Thank you. Our next question comes from the line of Keith Hughes with SunTrust Robinson Humphrey. Please proceed with your question..

Thank you.

Could you talk about within the merger and mattress components the coming the piece of the business in the quarter and but any update you can give us in October in terms of where trends are going month a day?.

Keith, there was a quarter generally the revenue lot of fluctuation between particular periods in the quarter, it was pretty much evenly spread over that period of time. Looking at current business through the first three weeks of October, our business is flat to just slightly up compared to year ago.

If you look at our bedding business in Europe, currently we have been successful in taking some share there and I think in a market there is a little bit sluggish track right now, we - the first three weeks have been up healthy on that.

So, I think right now from a comparison standpoint we’ll holding our own with last year, don’t obviously, we’re early end of the quarter so it will yet to be seeing how that plays out..

Is that in the furniture market, you would say that not to put words in your mouth that the thing seems to be reasonably strong to your comments regarding the highpoint, that things are less bad..

Yes, we saw although I wasn't particularly impressed with the attendance in high point. It seems like our furniture customers were happy with the order writing they were doing.

We obviously have - had some opportunities there that we spoke about it in Investor Day with some content gains with things like tilt head and lumbars and things like that so, that all bodes well for us, but it does seem like there has been a bit of a step change in the pace for furniture, which we normally would kind of expect this time a year..

So, that’s last comment through October, is that both mattress and furniture or is that a mix of both?.

Well, I was referring specifically to bedding on the first three weeks of October, but furniture would be probably outpacing that just a little bit right now..

Okay. Thank you..

Thank you. Our next question comes from the line of Lee [ph] with Longbow Research. Please proceed with your question..

Thank you.

I want to talk a little bit about what pricing looks like going forward with the recent steel inflation and the Susan I know you just said you expect steel inflation at some point, what does that mean for pricing going forward?.

This is Karl. Steel is really tough for us to forecast. Susan’s commentary on an expectation of ultimate inflation is kind of steeped in the thought process that it can’t go much lower at this point, that we had a little bit of head fake on steel, where scrap traded up little north of $50 a ton in the second quarter.

We expected that there would inflation off of that. It did not take place actually scrap traded down about $20 a ton in September and now $20 in October. So, there is a little bit of softness.

At the current price of scrap, scrap probably won't be collected, so hopefully into 2017 that there'll be a resurgence in demand, there'll be an equalization of pricing. As odd as it sounds, we badly want inflation that admittedly there is a 90-day lag on pass-through.

While we appreciate the short-term margins that we booked in the third quarter of this year, we want inflation, we need inflation and we expect it to some degree next year, but to predict timing is a real challenge..

Thank you..

Thank you. Our next question comes from the line of Bud Bugatch [ph] with Raymond James. Please proceed with your question..

Good morning, everyone. This is Bobby filling in for Bud, I appreciate you guys taking my questions..

Hi, Bobby..

I just want to touch real quick on the adjustable base business, I believe this is kind of - I think believe it’s a second quarter in a row, units were down, is that just a function of tougher comps maybe some competition in the lower price point, or you see changing consumer behavior and some pressure in attachment rates?.

Bobby, actually all those things, that as you know that comp was tough, adjustables were up 55% in 3Q 2015. Some of that was a pull forward by large customer of ours that was about go through and ERP implementation, so they pull forward some 4Q 2015 volume into 3Q 2015. So, that made that comp, that comp that much tougher.

There is no question that we’re been impacted by soft market demand. We are also going through a conversion of adjustables been sold through OEM mattress manufacturers and taking out that inefficiency and now being sold directly to retail.

So, therefore you should see significantly fewer adjustable sold through the residential side of the business which as the commentary previous stated that those as you know, those were just pass-through sales, had very little margin impact. On the residential side, but certainly there were a lot of sales dollars associated with that.

The product is manufactured and the commercial segment will now primarily be sold out of the commercial segment and we’re going through this transition where we’re ramping down inventories at the OEM side, ramping up inventories at the direct-to-retail.

So, mix that altogether, we have not lot share by the way if the low end you made reference there, that there is no question that AUSPs are dropping on adjustables which is probably a good thing for the business from a long-term perspective and that it means longer term there’ll be more unit sold. But we are not disadvantaged it in that equation..

Given that the AUSPs are dropping as you reference, have you seen attachment rates start to pick up at the lower end of the mattress industry, the sub 1,000 mattresses..

Yes, there is no question that there is a pickup at the lower end and there probably is a little bit of softness at the ultra-premium and that ultra-premium consumer is probably a little bit of little cautious and I would think that the way you heard on Tempur’s call yesterday that they made reference to the fact that their attach rates were less at premium price points.

We are seeing that across the market..

Good, I appreciate the color. And then maybe lastly for me.

At the Investor Day, we saw some exciting things with Quantum Edge and Micro Cores inside the bedding division, can you maybe update us on how the penetration is going for those items and maybe what the kind of - what we might see in next year for some of those?.

Bob, you’re really becoming the bedding guy, I appreciate the fact that you - was exciting because he is just really excited, but anyway go it Perry..

Bob it’s - we are seeing some pretty steady growth on the upholstery layer replacement side of our business, which is basically our nano coils and our soft-tex tac products the lower height pocket springs that we manufacture.

Quantum Edge is - I really I am excited about I think as we get into next year I believe that we will see that pace really quick and that obviously, ad gives us content gains.

It also will affect our average unit selling price going forward that’ll be a little bit of a disconnect there where we are now but we think there is some really strong introductions going to happen in the part - and we’re excited about being able to replace a lot of that form edge with spring products..

I appreciate the color. Best of luck in the fourth quarter..

Thank you, Bobby..

Thank you. Our next question comes from the line of Dillard Watt with Stifel. Please proceed with your question..

Thanks. Good morning, everyone. Only if you can talk a little bit about the aerospace business, it’s I guess two quarters in a row here where we are negative. Anything in particular going on or is it just some lumpy orders..

No, Dillard, actually we’re experiencing some softness in our welded tube business, the straight tube business, which was the first acquisition Western where there is a little reduction in selling price and candidly we have lost a little bit of market share.

In the seamless to the French business that that business is performing really, really well as is the value-added businesses that we added subsequent bolt on acquisitions. So, it's the original base business where we're experiencing some softness. The market is lumpy overtime, but two quarters in a row I can't blame on lumpiness..

Thank you very much..

Thanks, Dillard..

Thank you. [Operator Instructions]. Our next question comes from the line of Keith Hughes with SunTrust Robinson Humphrey. Please proceed with your question..

Thanks. Just wanted to drill down a little bit on Karl on your discussion on the adjustables. Specific to Leggett, are you having any shifts of your customers, accounts you've won or accounts you’ve lost things of that nature. And also, just, do you expect overall the price point of an adjustables to continue to fall, I think that's what you're saying.

And does that mean some of the functionality in adjustables will go away..

Yeah, Keith, thanks for the questions. Yes, there are the customer wins and losses all the time, especially as we migrate, the industry migrates from predominantly distributed through OEM to predominantly distributed through retail. So, there is those shifts. And the magnitude of volume through each channel changing pretty significantly.

Interestingly enough as the product is decreasing or let's call it more fully penetrated in terms of units and price points, the features aren't changing all that much that as you drop into the promotional price points historically that would be a wired bed, it's a wireless product today.

The head-only product hasn't sold significant well, so as electronics, the cost of electronics dropped, the significant volume growth from the macro market in terms of throughput through assets that the consumer is not losing much functionality as the pricing at retail drops..

And just one other question on bedding the comfort core negative 2% kind a looking like the industry right now or it been well outperformed or do you think those kinds a hit at the top in terms of this market shift?.

No, Keith, it's Perry, I don't. We're in the mid-30s now as far as percentage of springs that we sale that are in the company four categories. We have the base among ourselves as to how strong it will get in the U.S. market. But I certainly think we got opportunities to go kind a well north of 40 some people say to be 50% in the future.

But I don't think we're by any means done with the growth of that category and like I said just a little bit ago. I don't think we're we've scratch the surface with the content gain that we look to gain over the next couple of years..

Thank you..

Thank you. Mr. DeSonier, there are no further questions at this time, I'd like to turn the floor back to you for any final remarks..

We'll just quickly close by saying, thank you. We appreciate your time and we'll talk to you again in about three months..

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..